#AI #CharGPT #Grok Can lower bank capital/equity requirement against residential mortgages cause house prices to be higher than what the real economy can justify?
I asked ChatGPT:
Answer with about 300 words or less:
"If with lower bank capital/equity requirements you make banks hold more residential mortgages than loans to small businesses and entrepreneurs, will not house prices, in the long term, become higher than what the real economy can justify?"
ChatGPT answered:
Yes, lower bank capital requirements can lead to an overallocation of credit to residential mortgages at the expense of loans to small businesses and entrepreneurs. When banks face lower capital requirements for mortgages compared to business loans, they have an incentive to prioritize lending for housing. This increased credit availability for homebuyers drives up demand and, consequently, house prices.
Over the long term, this dynamic can push housing prices above levels justified by fundamentals like wage growth, productivity, and overall economic output. Since small businesses and entrepreneurs are crucial drivers of economic expansion, their reduced access to credit can limit job creation, innovation, and GDP growth. This imbalance can create a situation where housing prices rise faster than the broader economy, making homeownership less affordable and increasing financial instability.
Such credit distortions have been observed in past financial crises. For instance, in the years leading up to the 2008 financial crisis, favorable capital treatment for mortgage lending contributed to excessive credit growth in housing, fueling a price bubble that eventually collapsed.
Thus, if policymakers want to ensure sustainable house prices aligned with real economic growth, they should consider capital requirements that do not disproportionately favor mortgage lending over productive business investment.
I said: Thanks!
It answered: You're welcome! Let me know if you ever want to dive deeper into this or anything else.
I asked Grok 3:
Answer with about 300 words or less:
"If with lower bank capital/equity requirements you make banks hold more residential mortgages than loans to small businesses and entrepreneurs, will not house prices, in the long term, become higher than what the real economy can justify?"
Grok 3 answered:
Lower bank capital or equity requirements reduce the amount of "skin in the game" banks must have, making it easier for them to lend. If this incentivizes banks to favor residential mortgages over loans to small businesses and entrepreneurs—say, due to perceived lower risk or regulatory nudges—then yes, it could skew credit allocation. More mortgage lending pumps demand into housing markets, driving up house prices. Over time, if this outpaces growth in the "real economy"—like wages, productivity, or business output—prices could detach from fundamentals, creating a bubble.
Small businesses and entrepreneurs, starved of credit, might stagnate, slowing innovation and job creation, which underpin sustainable economic growth. Mortgages, being asset-backed, feel safer to banks, especially with government guarantees (e.g., Freddie Mac, Fannie Mae in the U.S.), while small business loans are riskier and less collateralized. Lower capital requirements amplify this bias by letting banks stretch thinner, prioritizing volume in "safe" lending like mortgages over riskier, growth-oriented loans.
Data backs this: post-2008, U.S. banks held mortgage-heavy portfolios (about 30-40% of assets) while small business lending hovered below 20%, per Fed stats. Basel III’s risk-weighting rules also assign lower capital charges to mortgages than unsecured business loans, reinforcing the tilt. If sustained, this floods housing with cheap credit, bidding up prices beyond what incomes or economic output can support. Look at places like Canada or Australia—loose credit and mortgage booms have left house prices at 10x median income, double historical norms.
So, yes, long-term, house prices could climb higher than the real economy justifies, risking instability when the gap corrects. It’s not inevitable—depends on policy details and bank behavior—but the mechanism holds.
I said: Thanks!
It said:You’re welcome! Glad I could help. Anything else on your mind?
Note: The answers are copied exactly from those given to me by ChatGPT and Grok 3
Here is an old comment I made on this issue, based on a letter published by the Washington Post.
“Assets for which bank capital requirements were low, were what had most political support…home mortgages” Paul Volcker
In that class war between those who have houses as investment assets, and those who just want affordable homes, where do you stand?"
https://subprimeregulations.blogspot.com/2018/12/affordable-homes-or-investment-assets.html
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